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WHITEPAPERS

Is this another diversification trap?

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In this whitepaper you will discover:

  • When the index investing fad unwinds, volatility will increase
  • The dangers of heavily tech-weighted US index funds
  • The lack of fundamental research by ETF operators when allocating capital

SUBSCRIBE FOR FREE TO UNLOCK THIS WHITEPAPER

In this whitepaper you will discover:

  • When the index investing fad unwinds, volatility will increase
  • The dangers of heavily tech-weighted US index funds
  • The lack of fundamental research by ETF operators when allocating capital

Is this another diversification trap?

In the wake of the global financial crisis (GFC), index ETFs were meant to offer risk-averse investors a safe and easy way to gain diversification. But nine years into the global market’s bull run, they appear to be pushing US tech stocks into unrealistic valuations in ways that may end badly for many.

In late 2018, we are at a fork in the road where investors may want to reconsider their strategies. The trillions of dollars flowing into ETFs peaked in March and we’re starting to see tech stocks return to earth. The FAANG stocks, which include the likes of Amazon, Facebook and Google, lost US$172.7 billion in value on 10 October alone.

This paper discusses our view that ETFs are a bubble that are in turn a transmission mechanism for a tech stock bubble. And that many investors in ETFs that follow indexes are as exposed as those who bought into collateralised debt obligations before the GFC.

It also discusses the opposing regulatory and consumer forces that might pop the bubble, especially among tech stocks, and open up buying opportunities.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.